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COT: Dollar long slashed, gold long jumped ahead of FOMC

Ole Hansen

Head of Commodity Strategy

Summary:  The COT reports published weekly by the US CFTC highlight futures positions and changes made by hedge funds across commodities, forex and financials. This update covers the week to January 25, a reporting week that encapsulated the runup to last Wednesday's surprisingly hawkish FOMC meeting. Ahead of the meeting speculators had been loading up on gold, cut oil longs while reducing bullish dollar bets by 40%. All developments that partly help to explain the aggressive reaction to the meeting and its raised forecast for future rate hikes.


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Saxo Bank publishes weekly Commitment of Traders reports (COT) covering leveraged fund positions in commodities, bonds and stock index futures. For IMM currency futures and the VIX, we use the broader measure called non-commercial.

This summary highlights futures positions and changes made by hedge funds across commodities, forex and financials up until last Tuesday, January 25. A reporting week that encapsulated the runup to last Wednesday’s FOMC meeting where its chair Jerome Powell, as expected, backed a March liftoff in rates before spooking the markets by not ruling out a potential hike at every meeting to tackle the highest inflation in a generation. 

Ahead of the meeting the stock market had seen another week of steep losses led by the 7% drop in the tech-heavy Nasdaq index. Recent dollar selling, which had driven a 40% reduction in bullish IMM dollar bets, showed signs of running out of steam, bond yields softened as tumbling stocks reversed some of the recent selling. Broad gains across the commodity sector saw the Bloomberg Commodity Index continue its ascent towards a fresh record high. 

Commodities

The Bloomberg Commodity Index continued its weeklong ascent with the 1.4% increase taking the index close to a fresh record high. As can be seen in the table below, gains were concentrated in oil and fuel products, as well as metals and the agriculture sector. The latter on increased demand for plant-based fuels such as soybean oil and sugar driven by an ongoing rally in fossil fuels, and surging wheat prices with the Ukraine-Russia crisis raising concerns about supplies from the Black Sea region, a major exporting center. 

Overall, these developments helped drive a 6% increase in the leverage position held by large money managers to 2.12 million lots, representing a nominal value of $146 billion. Buying was concentrated, and wrongly as it turned out following the hawkish FOMC meeting, in gold, while other contracts seeing strong demand were platinum, soybeans, corn, wheat, sugar and hogs. 

Energy: Crude oil’s continued ascent continued during the reporting week, albeit at a slower pace with traders keeping a nervous eye on the general level of risk appetite amid tanking stocks ahead of the FOMC meeting. Brent crude oil’s first and failed attempt to break above $90 together with the mentioned nervousness helped trigger a small reduction in the combined net long held in WTI and Brent by 19.5k to 540k lots. A very volatile natural gas market saw the net long reduced by 13k lots in response to a 3.8% sell off during the reporting week. 

Metals: Gold’s 2.2% rally following the technical breakout above $1830 supported a 39% increase in the net long to 118k lots. The 33k lots of net buying was the strongest since November and was driven by a combination of fresh longs and short covering. These developments helped explain why the subsequent sell-off following last Wednesday’s hawkish FOMC tilt ended up being that aggressive after recently established longs scrambled to get out. Palladium’s 15% rally on Russia supply concerns supported a 4.7% rally in platinum which helped flip the position back to a net long. Copper activity was low with a reduction in both long and short positions driving a small increase in the net long. 

Agriculture: The grains sector was bought for a second week with net buying lifting longs across most contracts. Not least soybeans which reached a seven-month peak on strength in demand for plant-based fuels such as palm and soy oils and poor crop weather in parts of South America. The net short in CBOT wheat has almost halved while the long in Kansas wheat jumped 24% as fears of Russian military action in Ukraine raised concerns about a potential disruption to supplies from the Black Sea region. 

Sugar buyers returned and for the first time in many weeks some notably buying helped lift the net long by 24% from an 18-month low. The general loss of risk appetite helped trigger some mild long liquidation across the three other softs contracts of cocoa, coffee and cotton. 

Forex

Ahead of last Wednesday’s hawkish FOMC meeting which helped drive the dollar to an 18-month high, the flow was skewed towards further dollar long liquidation. Against ten IMM currency futures and the Dollar Index the net dollar long was reduced by $2.3 billion to a four-month low at $14.1 billion, representing a 40% reduction during the past two weeks alone. Selling of dollars was broad against the major currencies but concentrated against the euro (7k lots) and JPY (12.6k lots) and it probably helps to explain partly why these two currencies were particularly hard hit by sudden dollar strength. 

What is the Commitments of Traders report?

The COT reports are issued by the U.S. Commodity Futures Trading Commission (CFTC) and the ICE Exchange Europe for Brent crude oil and gas oil. They are released every Friday after the U.S. close with data from the week ending the previous Tuesday. They break down the open interest in futures markets into different groups of users depending on the asset class.

Commodities: Producer/Merchant/Processor/User, Swap dealers, Managed Money and other
Financials: Dealer/Intermediary; Asset Manager/Institutional; Leveraged Funds and other
Forex: A broad breakdown between commercial and non-commercial (speculators)

The reasons why we focus primarily on the behavior of the highlighted groups are:

  • They are likely to have tight stops and no underlying exposure that is being hedged
  • This makes them most reactive to changes in fundamental or technical price developments
  • It provides views about major trends but also helps to decipher when a reversal is looming

 

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